Negative aspects related to cryptocurrencies as money

The negative aspects of cryptocurrencies associated with cryptocurrencies as a source of value are directly linked to cryptocurrencies. Among the disadvantages are the lack of regulation, the currency's volatility against the dollar, the potential of manipulation, the potential for tax evasion and money laundering, the poor degree of exchangeability for fiat currency and cyber security issues. Society has an interest in a stable monetary system and the disadvantages of cryptocurrencies mentioned here do not contribute to this.

4.2.1 Lack of regulation

According to Seele (2018) cryptocurrencies are enablers of unethical and illegal business, and arguably the ability to facilitate illegal activity is one of the biggest drawbacks and regulatory concerns surrounding cryptocurrencies. In particular, transactions on the black market are often fulfilled with cryptocurrencies for, for example, the purchase of weapons, drugs or child pornography. On the gray and black markets, many online transactions are settled in cryptocurrencies. In this regard, the 'dark web' marketplace Silk Road has become infamous for allowing the purchase of drugs against payment of Bitcoins before it was shut down in 2014.¹³ Cryptocurrencies are fully digital and all transactions are recorded in a blockchain.

Potentially, the technology is completely transparent, but at the same time its impenetrable nature makes it most suitable for illegal transactions around the world. With no storage or transportation problems - as in the case of cash or gold - it crosses national borders and this has not gone unnoticed by many criminals, who are currently using the technology to protect themselves from surveillance or law enforcement. What better proof of quality can you provide when even the Italian mafia uses cryptocurrencies like Bitcoin to circulate black money? According to the Italian newspaper Repubblica, crime cartels such as the Camorra and the 'Ndrangheta use Bitcoin for transactions where documents or documentation are not necessary or inappropriate given the nature of the illegal transaction (Seele, 2018, p. 135).

For illegitimate and illegal cryptocurrency transactions, secrecy is the key feature. Secrecy plays an ambivalent role in ethical considerations. On the one hand, it facilitates criminal activity by protecting the criminal's identity. On the other hand, secrecy as part of privacy is a right guaranteed in most constitutions.

In open democratic societies, privacy is anchored in legislation and regulations, which means that it has a certain ethical value for the individual and for the society of which the individual is a part. In countries with totalitarian regimes, privacy rights are often suppressed and secrecy-enhancing technologies such as cryptocurrencies can play a vital role for the oppressed and the opposition. Technically, full transparency is possible, but in reality, at least for the participating user and currently for (most) legal authorities, the information packets on the blockchain remain invisible, allowing anonymous transactions. This anonymity then enables a series of illegal and illegitimate transactions with unprecedented ease.

The way in which countries have organized their cryptocurrency regulations has a major impact on the ethical framework of a particular cryptocurrency. Seele (2018) gives an overview of the state of affairs in different countries:

- In the US, cryptocurrencies are considered commodities, not currencies, according to a federal judge's ruling.

- In Germany, each crypto coin is evaluated and assessed individually. This has the advantage that

13 https://darkweblinks.com/the-biggest-dark-web-market-ever-silk-road/

cryptocurrencies used for illegal transactions can be banned and approved cryptocurrencies can benefit from a regulatory status. However, the regulator BaFin is easily overloaded, because the evaluation procedure is time-consuming and there are more than 1000 crypto coins to be checked.

- In January 2018, South Korea banned all anonymous cryptocurrencies. Only digitally transparent and traceable transactions are considered legal in South Korea.

- China banned all Initial Coin Offerings in late 2017 and closed all trading platforms for cryptocurrencies. For China, which is known for both mining and speculating in cryptocurrencies, that was a big step backwards for cryptocurrencies.

- In Japan, cryptocurrencies were not banned, but all platforms that facilitate trading in cryptocurrencies require an official license.

- In Switzerland, regulation of cryptocurrencies has been made dependent on the purpose of the cryptocurrencies. If a cryptocurrency is intended to make payments, anti-money laundering measures must be taken. But in case a cryptocurrency is intended for Initial Coin Offerings, then the cryptocurrency is seen as a share.

Clearly, while cryptocurrency regulatory developments are still in their infancy, anarchy will come to an end in many jurisdictions. As so often, it is the unethical few who are forcing the world to take measures that affect the well-intentioned many to develop new forms of payment and decentralized currencies.

Technology is not good or bad in itself, but if transactions with bad ulterior motives gain more momentum, then regulatory action will have to be taken. And that will mean that privacy and data protection will have to be partly lifted.

4.2.2 Volatility and manipulation

The cryptocurrency market is highly volatile. Not only has the value of Bitcoin, for example, risen in more than 10 years from a few cents to a record high of $64,863.10 in April 2021 to approximately $30,000 in May 2022¹⁴, but the daily fluctuations are also impressive, as shown in Figure 4.1 below.

Outside of the top 10 cryptocurrencies, the total market cap of each coin quickly drops below $10 billion and outside the top 50 even below $1 billion. This means that for the vast majority of cryptocurrencies, there are relatively few outstanding units owned by so-called whales. The holders of this cryptocurrency (often the creators and a small circle around them) can effectively control the stocks of their coin, making it prone to manipulation.

The peer-to-peer transactions with cryptocurrencies means that there is no control by any third party.

14 https://bytwork.com/en/articles/btc-chart-history

This contributes to the volatility of cryptocurrencies, as the lack of supervision means that no central bank can step in to correct the markets. And finally, the volatility is fueled by the lack of an underlying asset, which makes cryptos appear as a bubble. Linking the value of cryptocurrencies directly to tangible and intangible assets would increase its predictability and hence consumer confidence and decrease crypto's volatility. Figure 4.1 shows the price of Bitcoin and its volatility from the start till the beginning of 2022.

Figure 4.1 Bitcoin volatility Source: highcharts.com

4.2.3 Tax evasion and money laundering

In addition to illegal transactions, fraud and theft are also among the various applications of cryptocurrencies (Spiegel, 2016), as are shadow banking and tax evasion (Van Alstyne, 2014). Bitcoin is one of the oldest cryptocurrencies and known worldwide, and for that reason many illegal transactions are done in Bitcoin. But in addition, even more cryptocurrencies have been developed to improve the level of anonymity and privacy, like for example Monero that was specifically developed to hide the identity of the business partners (Seele, 2018, p. 135).

Since most national governments do not regulate cryptocurrencies, they have no direct control over them. Once financial transactions can be safely conducted without government supervision, people may be tempted to skirt the law. The private nature of cryptocurrency flows makes it easy to evade taxes. In particular, startups in crypto companies, small employers, tend to pay their employees in cryptocurrencies,

which allows them to evade payroll taxes themselves and help their employees evade income taxes.¹⁵ And online merchants can ask their customers to pay in cryptocurrencies to try to avoid sales and income taxes.

But even with good intentions it is not always clear which taxes have to be paid. For example, the high volatility of cryptocurrencies makes it unclear which value should be taxed. Moreover, technological changes are happening at lightning speed, and regulations must follow, but they remain far behind the current state of affairs. For these reasons, it can be confusing what taxes to pay.

Cryptocurrency offers a combination of ease of use, speed and anonymity, and is not hampered by national borders and regulations, so it becomes very easy for fraudsters to cover up the source of criminal proceeds and thus to launder ill-gotten gains. Trade in illegal goods, ransomware extortion, ransom payment after kidnappings and cybercrime are examples of how money received from illegitimate business in the underworld can find its way into the upper world through cryptocurrencies.

4.2.4 Poor exchangeability with legal tender

In most countries of the world, crypto is not yet legal tender; in some countries the use of cryptocurrencies is not even allowed and in other countries there are barriers to the introduction of cryptocurrencies in everyday use. The study by Juhász et al. shows that Bitcoin (as the most used cryptocurrency) is mainly used by residents of large cities (Juhász, Stéger, Kondor, & Vattay, 2018, p. 16). Cryptocurrencies are therefore used much less outside the large cities, so probably less well-known and for that reason one may expect that residents in the province are also less familiar with the technology behind it. As a result, the use of cryptocurrencies is limited to those in society who have the privilege of working with technologies and the lack of general acceptance makes cryptocurrencies not really suitable for everyday use.

And for those who work with cryptocurrencies, a direct exchange for fiat currency is only possible with cryptocurrencies that have the highest market cap in dollars. And that means that if you own non-current cryptocurrencies, you must first exchange them for more widely used cryptocurrencies, such as Bitcoin or Ethereum, before you can exchange them for a fiat currency. This thus reduces the demand for and value of lesser-used cryptocurrencies.

Furthermore, not every seller accepts to be paid in cryptocurrencies; only certain vendors will accept this. Large and rapid fluctuations in the value of the digital currency make it difficult for companies to accept it as payment for goods and services, as the final amount to be received can vary by the hour. The irrevocable and immutable nature of transactions on the blockchain can lead to problems in business, which can also be a reason to refuse payment in cryptocurrencies.

15 https://www.analyticsinsight.net/top-companies-that-are-paying-its-employees-in-bitcoin/

4.2.5 Cyber security issues

Cryptocurrencies are stored in computer code and to authenticate transactions private keys are used to prove ownership. A private key is a complex password code that grants users access to a digital account. The great danger of cryptocurrencies is that such private keys are stolen and that digital money can be hacked.

On small scale the risk is that people keep their private key on their PC, which is very risky because ordinary PCs are very easily accessible for hackers. But even if there is no crime involved, once you lose your key, it is impossible to recover lost data and your cryptocurrency is gone forever due to the strict integration of the encrypted blockchain. On a larger scale digitally connected entities form a seamless digital infrastructure, and a large-scale hack puts financial infrastructure at risk and could endanger national security.

Digital currency is decentralized, so there is no government or financial institution overseeing the mining, movement and management of the currency. Cryptocurrencies are bought and traded in cryptocurrency exchanges, which -at present- are hardly or not at all supervised by the country where they are located. And while crypto miners have a role in mediating cryptocurrency transactions, they are not responsible for settling disputes between the parties doing business with each other. The core of modern cryptocurrency philosophy is its decentralized nature and the idea of an arbitrator who resolves disputes is at odds with this. This means that there is no one to help you if you are cheated in a cryptocurrency transaction -for example if you paid in advance, but never receive the item- and you are therefore on your own.